Junk Bonds Are Living Up To Their Name

DEFAULTS on speculative-grade corporate bonds - ``junk bonds'' - are on the rise once again, reflecting the strain of the recession on many over-leveraged corporations. What's worrying some bond experts is that defaults are coming far faster than expected - and surpassing default rates for the recession of 1981-82. ``We're having to reassess all our estimates on defaults,'' says Richard Lehmann, president of the Bond Investors Association (BIA), and editor of the Defaulted Bonds Newsletter, a monthly guide published in Miami Lakes, Fla.

Last fall, the BIA expected that corporate-bond defaults would reach about $25 billion for 1991, after defaults of $4.6 billion in 1988, $11.8 billion in 1989, and $26.4 billion in 1990. But the organization has had to substantially boost estimates for this year. He now anticipates that defaults will reach $35 billion this year, and perhaps as high as $50 billion.

Moreover, he predicts that roughly half of all junk bonds issued between 1985 and 1989 - the period when junk bonds were widely used to finance leveraged takeovers and other speculative Wall Street endeavors - will go into default. That 50 percent rate would be well above the more typical 38 percent default rate for junk bonds in the past. All told, some $100 billion in bonds will need to be financially restructured during the next two to three years, Lehmann says.

Junk bonds are high-yield but highly risky bonds issued by companies that for one reason or other could not get a corporate-grade rating. Estimates as to how many junk bonds are outstanding vary. The traditional number, popularized by the former Wall Street firm of Drexel Burnham Lambert (which was a major underwriter of junk bonds until its eventual collapse) was about $200 billion.

``But Drexel went out of its way to overlook many bonds with high default rates,'' Lehmann says. He reckons that there are $300 billion in junk bonds outstanding, some of which started out as corporate-grade issues (BBB or better), and were subsequently downgraded.